The debate about how much of your income you should contribute to a company-sponsored retirement plan rages on. Some say 10% and some say 15%, but according to Aon Hewitt the average 401k contributor only contributed 7.3% of her income. What percentage is right for you?
How many years will you spend in retirement?
One of the main things you’ll have to think about is how many years you might spend in retirement. If you want to retire at 65 and the average American will live to be about 85 years old, you’ll spend about twenty years in retirement. That’s a very long time, but your family history might suggest that you’ll live to be 93 or 107. Obviously, the more you invest, the better.
If you plan to live a few more years than you actually think you might, you’ll give yourself a bit of a financial cushion during retirement. The worst case scenario is that you planned for only twenty years, lived longer than that, and now your nest egg is quickly being depleted. The best case scenario sees you with a sizable nest egg to draw off of, Social Security coming in, and a plan in place to draw the money strategically while leaving a tidy sum to your inheritors.
What do you want those years to look like?
Some of us want to retire to a foreign country. Some of us want to sit in a rocking chair and enjoy our families. Some of us want to travel the world and do all the things we couldn’t do while we were working. What do you want your years in retirement to look like? How much money you’ll need to sock away will depend on how you plan on spending those years in retirement. Golf fees and plane tickets can get pretty expensive. Thinking about what you want to do in retirement, and how much money that life will cost you per year, is a great way to think about how much money you should be socking away now. Unless you want to work until you drop dead, you’d better start planning an exit strategy.
Speaking with a fee-only financial advisor is a great way to start sketching out those ideas. No one can tell you what your life will look like during retirement, but speaking with a fee-only financial advisor can help you to better understand where you stand now and what you need to do to make your retirement plans come to fruition. Will you have paid off all of your debt by then? Will your mortgage be paid off? Will you be taking on new debt (new home, time share, etc.) to live the life you want?
How much money will you need to create that life?
Conventional financial planning says you should only draw 4% to 5% of your retirement portfolio per year. How much money will you need to have in order to last you all of those years, in the lifestyle you want to live, is a very important number. The most confusing part of planning for retirement is that everyone’s number is going to be different based on how long you might live, what you’ve saved and what you plan to do while in retirement.
While the answers to these questions are difficult to answer, what’s not difficult to answer is that you have to take advantage of compound interest and investing now if you want to have any kind of retirement. The great thing about employer-sponsored 401k plans is that the dollars you are using to invest for retirement are dollars that you would have been taxed on. That’s right: you can pay the money to Uncle Sam or pay the money to yourself for retirement. Speaking with a fee-only financial advisor can help you take advantage of all the help from your employer-sponsored plan to shore up your retirement fund while paying less in taxes.
Speak with a fee-only advisor as soon as possible and increase your 401k contribution to 15%. Which situation will make you more upset: you end up with more money than you think you need and have a cushy retirement or you end up without enough funds to allow you to live independently and wish you had made better choices? Invest as much as you can as early as you can and if it shaves a few bucks off of your tax bill, all the better.
Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. To schedule Shay to speak at your event or to find out more about her work, visit her at www.BiggerThanYourBlock.com.
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